Finance
How a Bridging Loans Works: An Example of Bridging Finance
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Bridging finance is a comparatively straightforward financial product. Issued as a strictly short-term facility, bridging loans offer a flexible and cost-effective alternative to conventional loans and mortgage.
Bridging finance is a comparatively straightforward financial product. Issued as a strictly short-term facility, bridging loans offer a flexible and cost-effective alternative to conventional loans and mortgage.
But as is often the case, it is not until you see a bridging loan put to use in a practical context that the potential benefits of the facility become clear. In order to clarify any confusion as to how a bridging loan works, here is a brief example of how a bridging loan can be put to use:
Bridging finance for a property purchase, refurbishment and sale
An established property investor comes across a mixed-use building for sale at a low price, due to the extent of the renovation work needed. The property is put up for sale at auction, where the investor places a successful bid of £800,000.
During the bridging finance application process, the lender conducts a valuation on the property, which determines its actual market value as closer to £1 million. Consequently, a bridging loan is offered at 80% LTV based on its actual market value, providing the borrower with 100% of the £800,000 needed to purchase the property.
Having already received a decision in principle on a bridging loan, the buyer is able to access the funds needed to pay for the property in full before the four-week deadline.
Over the course of the next six months, the property is renovated and refurbished to a considerably higher standard. Upon completion of the project, the market value of the development has increased to around £1.5 million.
The development is sold for its full market value, the bridging loan is repaid (plus rolled-up monthly interest) and the remaining profits are retained by the developer.
By making use of affordable bridging finance, the investor has made a significant profit over the course of just six months by purchasing and renovating a property no conventional bank would be willing to lend against.
Common Questions about Bridging Loans
Bridging finance is a short-term facility for time-critical property purchases, investments and outgoings. A bridging loan can often be accessed within a matter of days, and is typically repaid six to 12 months later.
Eligibility is determined primarily on the basis of the availability of assets to secure the loan, along when the applicant’s exit strategy – i.e. how they intend to repay the loan.
Some lenders set limitations on minimum and maximum loan amounts – often from £100,000 to more than £10 million. Elsewhere, there are no upper limits to how much can be borrowed, if sufficient equity is provided to secure the loan.
Monthly interest rates can be as low as 0.5% or less – seek broker support before applying to ensure you get the best possible deal.
Whereas a typical mortgage or property loan can take several months to arrange, a bridging loan can be organised and accessed within a matter of days.
To learn more about bridging products available to you, please check out the types available from bridgingloans.co.uk.
About the Author:Craig Upton supports UK businesses by increasing sales growth using various marketing solutions online. Creating strategic partnerships and keen focus to detail, Craig equips websites with the right tools to rank in organic search. Craig is also the CEO of iCONQUER, a UK based SEO company and has been working in the digital marketing arena for many years. A trusted SEO consultant and trainer, Craig has worked with British brands such as UK Property Finance, Serimax, djkit and also supported UK doctors, solicitors and property developers, gain more exposure online. Craig has gained a wealth of knowledge using Google and is committed to creating new opportunities and partnerships.
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